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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Bank Capital Pressures, Loan Substitutability, and Nonfinancial Employment
Seung Jung Lee
Viktors Stebunovs
Abstract

We exploit the cross-state, cross-time variation in bank tangible capital ratios-brought about by bank branch deregulation on a state-by-state basis-to identify the effects of bank capital pressures on employment and firm dynamics during two waves of changes in bank capital regulation. We show that stronger capital pressures temporarily slowed down growth in employment in industries that depend on external finance, retarding growth in the average size of firms rather than in the number of firms. Such effects were particularly strong for smaller firms that may not have had access to national capital and bank loan markets. Our findings indicate that a tightening of capital requirements may have significant real effects, in part because of the lack of substitutes for bank loans.


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Seung Jung Lee & Viktors Stebunovs, Bank Capital Pressures, Loan Substitutability, and Nonfinancial Employment, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 1161, Apr 2016.
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Keywords: Bank capital ratios ; bank capital regulation ; loan substitutability ; employment ; firm dynamics
DOI: 10.17016/IFDP.2016.1161
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